* Normalised figures are based on US GAAP, adjusted for acquisition-related, share-based remuneration and restructuring charges. For reconciliation of GAAP measures to normalised non-GAAP measures detailed in this document, see notes 8.1 to 8.27.
** Before dividends and share buybacks, net cash flows from share option exercises and acquisition consideration - see notes 8.14 to 8.18.
*** Dollar revenues are based on the group’s actual dollar invoicing, where applicable, and using the rate of exchange applicable on the date of the transaction for invoicing in currencies other than dollars. Approximately 95% of invoicing is in dollars.
**** Each American Depositary Share (ADS) represents three shares.

Financial review(US GAAP unless otherwise stated)

Total revenuesTotal dollar revenues in Q2 2007 were $129.2 million, up 8% on Q2 2006 and at a similar level to last quarter. Sterling revenues of £65.5 million were flat year-on-year after an 8% weakening of the dollar against sterling ($1.97 in Q2 2007 compared to $1.82 in Q2 2006). At the Q2 2006 effective rate, Q2 2007 sterling revenues would have been £70.9 million.

License revenues
Total dollar license revenues in Q2 2007 grew by 15% to $59.3 million, representing 46% of group revenues, compared to $51.7 million in Q2 2006. License revenues comprised $45.3 million from PD and $14.0 million from PIPD.

Royalty revenuesTotal dollar royalty revenues in Q2 2007 were down 1% at $47.4 million, representing 37% of group revenues, compared to $48.1 million in Q2 2006. Royalties in the quarter were affected by a combination of normal seasonality, the semiconductor industry inventory correction and lower foundry utilisation levels. Royalty revenues comprised $40.1 million from PD and $7.3 million from PIPD which included $0.6 million of “catch-up” royalties. Underlying royalties of $6.7 million for PIPD were broadly flat compared to underlying royalties in Q2 2006 while overall foundry industry revenue declined by approximately 15% over the same period, indicating encouraging market share gains.

Development Systems and Service revenues
Sales of development systems in Q2 2007 were up 9% to $14.1 million, representing 11% of group revenues, compared to $12.9 million in Q2 2006. Service revenues in Q2 2007 were up 20% to $8.4 million, representing 6% of group revenues, compared to $7.0 million in Q2 2006.

Half-year Development Systems revenues were $27.7 million, up 3% on 2006. Services revenues were up by 25% to $16.3 million.

Gross margins for the half year, excluding stock-based compensation charges of £0.5 million, were 89.6% compared to 89.0% in 2006.

Operating expenses and operating margin
Total operating expenses in Q2 2007 were £48.0 million (£46.4 million in Q2 2006) including amortisation of intangible assets and other acquisition-related charges of £4.8 million (Q2 2006: £5.1 million) and £4.5 million (Q2 2006: £4.0 million) in relation to stock-based compensation charges. The total stock-based compensation charges of £4.8 million in Q2 2007 are included within cost of revenues (£0.3 million), research and development (£2.8 million), sales and marketing (£0.9 million) and general and administrative (£0.8 million). In Q2 2007, the Group closed one of its smaller design centres in the US, in order to concentrate engineering activities in fewer sites, at a total cost of £0.8 million. Normalised income statements for Q2 and H1 2007 and Q2 and H1 2006 are included in notes 8.24 to 8.27 below which reconcile US GAAP to the normalised non-GAAP measures referred to in this earnings release.

Operating expenses (excluding acquisition-related, stock-based compensation and restructuring charges) in Q2 2007 were £37.8 million compared to £39.3 million in Q1 2007 and £37.4 million in Q2 2006. The sequential decline in operating expenses arises as the current year cost impact of the increased headcount through 2006 is more than offset by the benefits of re-balancing the group’s resources between higher and lower cost areas, general rigorous management of operating expenses and a favourable foreign exchange impact. Further, following the significant investment in headcount in 2006, headcount remained broadly flat in the first half of 2007 (see People below).

Normalised research and development expenses were £15.5 million in Q2 2007, representing 24% of revenues, compared to £16.6 million in Q1 2007 and £15.0 million in Q2 2006. Normalised sales and marketing costs in Q2 2007 were £10.5 million, being 16% of revenues, compared to £11.1 million in Q1 2007 and £9.8 million in Q2 2006. Normalised general and administrative expenses in Q2 2007 were £11.9 million, representing 18% of revenues, compared to £11.6 million in Q1 2007 and £12.6 million in Q2 2006.

Normalised operating margin in Q2 2007 was 32.0% (8.1) compared to 30.3% (8.2) in Q1 2007 and 32.2% (8.3) in Q2 2006. Operating margins in Q2 2007 were slightly lower than Q2 2006 due to the 8% weakening of the US dollar against sterling. At constant currencies, using the Q2 2006 effective rate of $1.82/£1, the operating margin for Q2 2007 would have been approximately 35%.

Total operating expenses for the first six months of 2007 were £96.0 million, including acquisition-related, stock-based compensation and restructuring charges of £9.9 million, £8.2 million and £0.8 million respectively. Excluding these charges, operating expenses for the half-year were £77.1 million, compared to £71.9 million in 2006.

Half-year normalised research and development expenses were £32.1 million in 2007, representing 24% of revenues. Half-year normalised sales and marketing expenses were £21.6 million or 16% of revenues. Total normalised general and administrative expenses were £23.5 million, representing 18% of revenues.

Normalised operating margin for the first six months of 2007 was 31.1% (8.4) versus 33.9% (8.5) for 2006. Using ARM’s 2006 half-year effective rate of $1.79, the normalised operating margin for H1 2007 would have been approximately 35%.

Earnings and taxation
Income before income tax in Q2 2007 was £12.0 million compared to £19.0 million in Q2 2006. After adjusting for acquisition-related, stock-based compensation and restructuring charges, normalised income before income tax in Q2 2007 was £22.5 million (8.6) compared to £23.0 million (8.8) in Q2 2006. The group’s effective tax rate under US GAAP in Q2 2007 was 26%, reflecting the availability of research and development tax credits and taking into account the benefits arising from the structuring of the Artisan® acquisition.

In Q2 2007, fully diluted earnings per share prepared under US GAAP were 0.64 pence (3.87 cents per ADS****) compared to earnings per share of 1.00 pence (5.57 cents per ADS****) in Q2 2006. Normalised fully diluted earnings per share in Q2 2007 were 1.18 pence (8.19) per share (7.11 cents per ADS****) compared to 1.22 pence (8.21) (6.78 cents per ADS****) in Q2 2006. Normalised fully diluted earnings per share in Q2 2007 using the Q2 2006 $/£ effective rate of 1.82 would have been 1.38 pence, up 13% on Q2 2006.

Balance sheetIntangible assets at 30 June 2007 were £389.1 million, comprising goodwill of £341.0 million and other intangible assets of £48.1 million, compared to £349.2 million and £56.0 million respectively at 31 December 2006.

Total accounts receivable were £75.0 million at 30 June 2007, comprising £44.2 million of trade receivables and £30.8 million of amounts recoverable on contracts, compared to £67.0 million at 31 March 2007, comprising £39.1 million of trade receivables and £27.9 million of amounts recoverable on contracts. Days sales outstanding (DSOs) were 51 at 30 June 2007 compared to 41 at 31 March 2007.

Cash flow, share buyback programme and interim dividendNet cash at 30 June 2007 was £108.9 (8.11) million compared to £126.8 (8.12) million at 31 March 2007. Normalised cash generation in Q2 2007 was £10.0 million (8.14).

During the quarter, £33.6 million of cash was returned to shareholders, by way of payment of the 2006 final dividend of £8.0 million and purchase of 18.4 million own shares at a total cost of £25.6 million (up from £20.2 million in Q1 2007). It is anticipated that the buyback programme will resume after the announcement of these results.

In respect of the year to 31 December 2007, as indicated in the Company’s Q1 earnings release in April, the directors are declaring an interim dividend of 0.80 pence per share, an increase of 100% over the 2006 interim dividend of 0.40 pence per share. This interim dividend will be paid, out of the UK GAAP distributable reserves of ARM Holdings plc, on 5 October 2007 to shareholders on the register on 31 August 2007.

International Financial Reporting Standards (IFRS)ARM reports results quarterly in accordance with US GAAP. At 30 June and 31 December each year, in addition to the US GAAP results, ARM is also required to publish results under IFRS. The operating and financial review commentary included in this release on the US GAAP numbers is for the most part applicable to the IFRS numbers and, in particular, revenues, dividends and share buybacks are recorded in the same way under both sets of accounting rules. A summary of the accounting differences between IFRS and US GAAP and reconciliations of IFRS and US GAAP profit and shareholders’ equity are set out in note 7 to the financial tables below.

Operating review

Backlog
The Group order backlog was approximately 5% lower at the end of Q2 compared to the end of Q1 but remains at historically high levels. The maturity profile of the order backlog has improved with 46% of total backlog as at the end of Q2 expected to be recognised as revenue over the next two quarters compared to 41% as at the end of Q1 2007.

PD LicensingQ2 was a strong quarter for processor division licensing across the processor product portfolio. During the quarter 15 licenses were signed including three Cortex family licenses, four ARM11™ family licenses and one license (third in total) for the Mali™ graphics processor. Q2 licensing activity underpins further penetration of non-mobile markets as a high proportion of licensing in the quarter was for applications outside of the mobile phone market. In the quarter two Cortex-M3 processors were licensed for use in high-volume microcontroller applications, one of which was taken by Toshiba Microelectronics, a major MCU provider. The composition of Q2 licensing also supports the increasing ARM value per consumer transaction with further licensing of the Cortex-A8 processor for high-end phone application processors and the Mali processor license for enabling additional royalties beyond the traditional microprocessor royalties.

Q2 2007 and Cumulative PD Licensing Analysis

Multi-use

Term

Per-use

Cumulative

U

D

N

U

D

N

U

D

N

Total

Total

ARM7™

1

2

3

151

ARM9™

2

2

4

227

ARM11

1

3

4

57

Cortex-M3

1

1

2

9

Cortex-R4

9

Cortex-A8

1

1

8

Mali

1

1

3

Other

27

Total

15

491

U:Upgrade D:Derivative N: New

PD Royalties
PD units shipments in Q1 (our partners report royalties one quarter in arrears) declined 10% sequentially to 648 million units, although this was an overall increase of 17% versus Q2 2006. ARM9 shipments accounted for 40% of total units, including 17% relating to ARM926 shipments. ARM11 shipments again increased sequentially, comprising over 1% of total shipments.

Shipments were lower sequentially across a wide range of applications, reflecting the overall decline in the semiconductor industry in Q1 due to the combined effect of the inventory correction and the normal post-holiday seasonality in consumer electronics. Specific areas of weakness were in Wireless Handset related applications (Wireless Handsets, Smart Cards, and Bluetooth), PC related applications (Hard Disk Drives and Printers) and consumer electronics (Portable Media Players and Digital Television). Notwithstanding short-term industry conditions, shipments of ARM-based microcontrollers grew more than 10% sequentially and more than 140% versus Q2 2006. The embedded segment grew to over 11% of total shipments in the quarter from just over 10% in the previous quarter and just over 7% in Q2 2006. The proportion of shipments into the mobile and non-mobile segments remained consistent with shipments in Q4 at 66% and 34% of shipments, respectively.

PIPD LicensingPIPD license revenue in Q2 2007 at $14.0 million compares to $16.9 million in Q1 2007 and $15.8 million in Q2 2006. Conversion of order backlog into revenue was lower in Q2 than in recent quarters due to a higher proportion of the physical IP engineering effort being deployed on the development of leading-edge technology. The proportion to be deployed on conversion of order backlog is expected to be higher in the second half.

A significant milestone was achieved in the quarter with the signing of the first license for 45nm ARM physical IP with a non-foundry customer. Although the customer is not a Tier 1 IDM or large fabless customer, the license demonstrates the growing market for physical IP outsourcing that ARM expects to penetrate over time. We continue to be engaged in technical and commercial discussions with a range of customers over physical IP outsourcing and are confident of achieving our long-term goal of a significant portion of the physical IP market being outsourced to ARM over time.

As we continue to accelerate the physical IP technology roadmap, two significant operational milestones were achieved in the quarter. First, we had our first tape out of a 65nm device based on ARM silicon on insulator (SOI) physical IP. The tape out was achieved through a collaboration with UMC and enables a wider customer base access to SOI technology for their future designs. Secondly, ARM completed the first design using ARM’s 45nm physical IP incorporating an ARM1176. This represents a further important milestone in the development of our physical IP technology portfolio, as we position ARM as an attractive outsourcing option for the physical IP requirements of Tier 1 IDMs and large fabless companies.

Q2 2007 PIPD Licensing Analysis

Process Node (nm)

Total

Platform Licenses

Advantage™

65/90

2

Standard Cell Libraries

Classic™

90/180/250

3

Metro™

180

1

Advantage

45/65/90

3

Memory Compilers

Classic

180

1

Metro

180

4

Advantage

45/90

2

Velocity™ PHYs

90

1

Quarter Total

17

Cumulative Total

317

PIPD Royalties
Underlying PIPD royalties were strong in Q2 2007 against a backdrop of significantly lower foundry utilisation during the period. Underlying royalties in Q2 2007 were $6.7 million, a similar level to Q2 2006, whilst overall foundry industry revenue declined approximately 15% during the same period, demonstrating the continued increasing penetration and market share gains of ARM physical IP into chip designs.

PeopleAt 30 June 2007, ARM had 1,681 full-time employees, a net increase of 22 since the start of the year. Headcount increased by 48 in India and China and decreased by 26 in ROW, illustrating the ongoing regional re-balancing of ARM’s resources. At the end of Q2, the group had 664 employees based in the UK, 535 in the US, 178 in Continental Europe, 239 in India and 65 in the Asia Pacific region.

Legal mattersARM is currently involved in ongoing litigation proceedings with Nazomi Communications, Inc. and Technology Properties Limited, Inc. Details are set out in the 2006 Annual Report on Form 20-F filed with the Securities and Exchange Commission on 11 April 2007. Based on independent legal advice, ARM does not expect any significant liability to arise in respect of these proceedings.

IntroductionWe have been instructed by the company to review the financial information for the six months ended 30 June 2007 which comprise the IFRS consolidated interim balance sheet as at 30 June 2007 and the related IFRS consolidated interim statements of income and cash flows for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

Directors' responsibilitiesThe interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed.

This interim report has been prepared in accordance with the basis set out in Note 1.

Review work performedWe conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Review conclusionOn the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2007.

PricewaterhouseCoopers LLP
Chartered Accountants
London
26 July 2007

Notes:

(a) The maintenance and integrity of the ARM Holdings plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

Note
The results shown for Q2 2007, Q1 2007, Q2 2006, H1 2007 and H1 2006 are unaudited. The results shown for FY 2006 are audited. The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240(3) of the Companies Act 1985. Statutory accounts of the Company in respect of the financial year ended 31 December 2006, upon which the Company’s auditors have given a report which was unqualified and did not contain a statement under Section 237(2) or Section 237(3) of that Act, have been delivered to the Registrar of Companies.

Except for changes in accounting policy on the adoption of new accounting standards, as disclosed, the results for ARM for Q2 2007 and previous quarters as shown reflect the accounting policies as stated in Note 1 to the US GAAP financial statements in the Annual Report and Accounts filed with Companies House in the UK for the fiscal year ended 31 December 2006 and in the Annual Report on Form 20-F for the fiscal year ended 31 December 2006.

This document contains forward-looking statements as defined in section 102 of the Private Securities Litigation Reform Act of 1995. These statements are subject to risk factors associated with the semiconductor and intellectual property businesses.When used in this document, the words “anticipates”, “may”, “can”, “believes”, “expects”, “projects”, “intends”, “likely”, similar expressions and any other statements that are not historical facts, in each case as they relate to ARM, its management or its businesses and financial performance and condition are intended to identify those assertions as forward-looking statements. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a number of variables, many of which are beyond our control. These variables could cause actual results or trends to differ materially and include, but are not limited to: failure to realise the benefits of our recent acquisitions, unforeseen liabilities arising from our recent acquisitions, price fluctuations, actual demand, the availability of software and operating systems compatible with our intellectual property, the continued demand for products including ARM’s intellectual property, delays in the design process or delays in a customer’s project that uses ARM’s technology, the success of our semiconductor partners, loss of market and industry competition, exchange and currency fluctuations, any future strategic investments or acquisitions, rapid technological change, regulatory developments, ARM’s ability to negotiate, structure, monitor and enforce agreements for the determination and payment of royalties, actual or potential litigation, changes in tax laws, interest rates and access to capital markets, political, economic and financial market conditions in various countries and regions and capital expenditure requirements.
More information about potential factors that could affect ARM’s business and financial results is included in ARM’s Annual Report on Form 20-F for the fiscal year ended 31 December 2006 including (without limitation) under the captions, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is on file with the Securities and Exchange Commission (the “SEC”) and available at the SEC’s website atwww.sec.gov.

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